Once again the stability of top UK dividend stocks provides a relief from the chaos in the wider world. But the latest earnings season, which has just kicked off, means there’s still plenty to follow for income investors.
In our list of top dividend payers in the FTSE 100, 10 companies have issued reports so far, with more to come in the following weeks. Only a couple of them mentioned dividend in their statements though: HSBC (HSBA) which reiterated its pledge to pay out 50% of earnings (and it’s now paying quarterly dividends), and Unilever (ULVR) maintains it interim dividend for Q3.
September 2022 Update
As has been the trend over the past year, Big Tobacco remains at the top of the list in terms of yield. The forecast dividend yield for Imperial Brands (IMB) dropped to 6.62% from last month’s forecasted 7.35% as its share price rose, but it remains the top payer. Meanwhile, British American Tobacco (BATS) climbs one spot with a 6.40% yield.
BT (BT.A) and GSK (GSK) are also still expected to see dividends of above 6%.
Schroders (SDR) and Lloyds (LLOY) both reported their third quarter numbers in October and remain high up on our table. Schroders saw a 2.7% drop in assets under management over the quarter though, citing a fall for its Solutions fund as a key driver. Lloyds Banking said its third quarter was “robust” due to income growth, but in three months to September 30, pre-tax profit slumped 26% to £1.51 billion from £2.03 billion.
HSBC managed to beat expectations, despite its profits sliding 42%, and is the only financial services company in our list with a positive return this year. But due to its investments into business transformation, and higher interest rates, it expects a dividend payout ratio of 50% for 2023 and 2024. The dividend is 9 cents, versus 18 cents last quarter.
Meanwhile, Unilever (ULVR) confirmed that it will be maintaining its €0.4268 quarterly interim dividend for Q3 this year after a strong quarter. All units bar Nutrition saw double-digit growth, and the consumer goods firm expects underlying sales growth for the year to be above 8%. The company is also in the middle of a €3 billion share buyback programme and is expected to complete a second €750 million trance in December 2022.
Another company in the middle of a share buyback scheme is WPP (WPP), which also issued it’s third quarter earnings. Revenue rose 10% to £3.57 billion, with like-for-like revenue up 2.7%. Last quarter, the advertising and marketing firm increased its dividend by 20%. Its £800 million share buyback scheme will complete this year.
This month we’ve made a slight change to our methodology. We’ve discussed before the rationale for increasing the yield hurdle beyond 2%, our old target, especially given that inflation is around 10%. Interest rates are 2.25% now and the Bank of England is expected to hike rates next week to at least 3%.
So, to make it on to our monthly list, FTSE 100 companies need now to have a narrow or wide economic moat and pay a dividend and have a forward yield of 3% or more. Of the 32 stocks that make the grade on the moat and dividend criteria, 13 have a yield above 3%. This means wide moat Reckitt Benckiser (RKT), which had a 14% net revenue increase in the third quarter, makes the cut. However, narrow moat Intertek misses the mark with a 2.74% yield.
Other reporting companies that didn’t quite measure up to the top list this month were Bunzl (BNZL), which saw quarterly sales growth, and Relx (REL), with an improved year-to-date performance.
The London Stock Exchange Group (LSEG) and hotels group InterContinental (IHG) are both carrying on with their share buyback schemes. LSEG has been working on a £750 million on-market share buyback programme since August 2022 and is expecting to complete it within 12 months. IHG, which also started its programme in August, is planning to end it no later than 31 January 31, 2023.
Link’s Latest
Overall, UK dividends dropped 8.4% to £31.4 billion in the third quarter on the same period last year, according to Link Group’s UK Dividend Monitor. The figure was skewed by the delisting of mining giant BHP, and if excluded, dividends were 1.0% higher year-on-year. Special dividends were down 43% to £3.3 billion as the mining boom tailed off. Banks and financials made the biggest contribution to growth with a near 50% increase, with NatWest (NWG) making the largest impact.
With many UK companies reporting and paying dividends in dollars, the weaker pound has played a significant role in your investment returns. For the full year, the extraordinary surge in the US dollar will add a record £5.7 billion to UK dividends, Link says, with an even bigger effect likely in Q4 than Q3. For 2022 as a whole, UK dividends are forecast to hit £97.4 billion, up 5.5% on 2021.
Volatility Hits Markets
FTSE 100 yields have generally risen across the board as share prices have dropped during the latest market turmoil and Prime Ministerial musical chairs. In October, the FTSE 100 hit nearly 7,100 points early on, before dropping down to 6,800 ahead of the sacking of chancellor Kwasi Kwarteng. As we reach the end of the month, the FTSE has slowly clambered upwards, crossing the 7,000 line upon Rishi Sunak’s PM coronation before dipping below it yet again.
An analysis by EY-Parthenon released this week also found that more FTSE-listed companies issued 86 profit warnings last quarter, i.e., preparing the market that profits will be below expectations. This is the highest number for one quarter since the financial crisis. According to the FT, more than half of these warnings were caused by rising costs, while a quarter related to labour shortages.
Speaking of politics though, rather than being cut from the next tax year, dividend tax rates are staying the same at 8.75%, 33.75% and 39.35% for basic, higher and additional rate taxpayers. These were supposed to be cut under proposals outlined by Kwasi Kwarteng in his September 23 mini-Budget and since reversed. Most investors can generally shield dividends with their ISA limits, so again this change is likely to impact higher net worth individuals. People also have a £2,000 dividend allowance every year.
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